CHAPTER16 Stockholders' Equity Retained earnings

7 dividends paid to common and preferred shareholders

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7. Dividends paid to common and preferred shareholders are affected by the dividend preferences of the preferred stock. Preferred stock can be: a. Cumulative or noncumulative. b. Fully participating, partially participating, or non-participating. D. Appropriations of Retained Earnings—a reclassification of retained earnings for a specific purpose. Although appropriations are acceptable, costs and losses cannot be charged to such appropriations. Reasons for appropriations include: 1. Legal restrictions—for example, with treasury stock. 2. Contractual restrictions—for example, with bond covenants. 3. Existence of possible or expected loss—for example, with contingencies. 4. Protection of working capital position. E. Terminology. Current preferred usage include: 1. Retained earnings instead of surplus.
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2. Additional paid-in capital instead of capital surplus. 3. Appropriated retained earnings instead of reserve. F. Presentation and Analysis of Stockholders’ Equity 1. Presentation a. On the balance sheet—three categories normally appear. (1) Capital stock. (2) Additional paid-in-capital in excess of par (or stated) value. (3) Retained earnings or defecit. b. On the statement of retained earnings—the basic format is usually: (1) Beginning balance. (2) Additions. (3) Deductions. (4) Ending balance. Teaching Tip Illustration 16-3 presents the details of changes in stockholders’ equity accounts taken from the annual report of PepsiCo. Inc.
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